This paper explores the effect of informed trading, heterogeneity investment and liquidity shocks on the
valuation of credit default swaps (CDSs). Under the condition of asymmetric information, the informed trading
plays an important role in the valuation of CDS. Instruction order flow has a significant influence on CDS price.
And the scope of influence changes in accordance with different time interval, company status and the size of
bid-ask spread. Heterogeneity of investors seriously affects the market liquidity and subsequently affects the CDS
price. The bigger heterogeneity of the investment philosophy, investment habits, investment preference and so on
is the bigger risk for market liquidity, and the higher price for CDS shall be. On the contrary, the conclusion
is also consistent. The effectiveness of liquidity, whether it is before or after the financial crisis, dominates the
fluctuation of CDS price. The premium of liquidity accounts for 36% to 50% of the CDS price.
YANG Xing1 (杨星), FAN Chun1* (范纯), LI Gang2* (李刚)
. Informed Trading, Heterogeneity Investment, Liquidity Shocks and the Valuation of Credit Default Swaps[J]. Journal of Shanghai Jiaotong University(Science), 2016
, 21(1)
: 69
-80
.
DOI: 10.1007/s12204-016-1701-8
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